Business confidence rises, conditions still weak

Business conditions have risen slightly, but remain in negative territory.

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Businesses are cautiously confident about an improving global economy, but conditions remain difficult.

National Australia Bank's monthly business survey's confidence index rose 1 point to +3 in January, just above the level that means optimists outnumber pessimists and below long-term average levels.

However, business conditions remained at -2, despite a 3-point improvement last month.

Trading conditions jumped to 1 from -5 in December, and profitability also surged by 7 points but remains in negative territory at -1.

However, forward orders (which indicate the likely direction of activity over the next few months) were still stuck at -4, up just 1 point from December, and the employment index fell from-3 to -7, indicating that businesses are more likely to lay-off staff than hire.

"Business conditions were generally better across interest sensitive industries in January, but fell heavily in mining," he observed.

"Recent surveys have highlighted the gradual deterioration in conditions in recreation and personal services and transport and utilities (previous non-mining strong performers). This trend continued in January. It may well be that continuing weakness elsewhere is now spreading."

Mr Oster says the low inflation outlook and relatively weak business conditions are likely to prompt further official interest rate cuts.

He is expecting three more 25-basis-point reductions this year, with the next ones in May and June.

Weak expectations

A separate quarterly survey by the Australian Chamber of Commerce and Industry has also found a modest improvement in business expectations of future economic conditions.

ACCI's December quarter business expectations survey of more than 2,700 firms found a slightly higher proportion of businesses expected the economy to improve over the next year than in September.

However, at 43.7, the index is showing more businesses are still pessimistic about the outlook than are optimistic.

The measures for business conditions, sales revenue, selling prices, profits and employment also all continued to ease, but generally at a slower pace.

"The December quarter survey shows while business sentiment has shown early indications of stabilising, actual business trading conditions fell deeper into contractionary territory, with some indicators approaching, if not exceeding, the historic low levels recorded during the height of the global financial crisis," noted ACCI's chief economist Greg Evans in the report.

"Given the weakness in business trading conditions are yet to show signs of abating, including continuing lacklustre investment across the mainstream businesses, we still expect the economy will need the stimulus of further rate cuts."